The fund returned +8.02 in January, with the most notable gains in the currency and equity sectors.
Equities continued the run upwards we saw throughout 2017. U.S. fiscal policies and continued optimism about global growth added to the momentum. These trends persisted in the face of a U.S. government shut down and political tensions in Europe.
The U.S. dollar weakened significantly versus its major G10 counterparts. A weaker GDP release and comments by U.S. Treasury Secretary Steven Mnuchin weighed on the dollar. In commodities, a weaker dollar helped gold outperform while crude oil strengthened by more than 3% due to decreases in supply.
The largest risk allocation in our portfolio was in commodities, followed by long positions in global equities. Exposure to currencies increased due to broadening trends. Fixed income exposure remained historically low.Performance (as of 1/31/2018)
January provided a fertile trading environment for long-term trend followers. Trends in equity strength and U.S. dollar weakness persisted and even grew.
With a tense start to February, these trends could face opposition. U.S. political tensions, concerns about global equity valuations and a change in volatility likely will test the resilience of macro markets. However, there is an innate resilience within long-term trend following. These disciplined investment strategies identify market trends in an objective way, while utilizing key processes to manage risk. We remain confident in our systematic, rules-based approach as we look ahead to an uncertain trading landscape.
Consumer discretionary and financials outperformed as global equities strengthened throughout the month. Ultimately, U.S. equities rallied more than 5%, with corporate tax reform fueling an upbeat outlook. In the Eurozone, optimism about the region’s economic recovery caused equities there to strengthen as well. But the United Kingdom underperformed, closing the month slightly lower. This is due to fears that a stronger British pound would negatively impact the economy.
Directional positions within the equity sector remained intact. The portfolio is net long equities globally, as the strength and scope of long-term trends persist for the time being.
The U.S. yield curve, the spread between 2- and 10-year Treasuries, fell below 60 basis points in November. This is the lowest level in a decade, and typically signals a slowing economy. Selling pressure on the front end of the curve caused the 2-year note to enter a downtrend. Australian bonds rallied against their former long-term downtrends, driven by a downgraded inflation forecast from the Reserve Bank of Australia. Other sovereign fixed income markets remained muted.
We closed a short position in Australian 3-year bonds and opened a new short position in the U.S. 2-year Treasury. Our fixed income exposure remains on the low side of its historical range. This low exposure reflects the lack of long-term trends in global sovereign bond markets.
The U.S. dollar weakened versus all other G10 currencies, as well as many emerging market currencies. The dollar index reached a new three-year low. We saw slightly weaker employment data, a government shutdown, and U.S. Treasury Secretary Steven Mnunchin stating “a weaker dollar is good for us as it relates to trade.” Elsewhere, German politics remained a focus and optimism for Eurozone growth helped boost the euro.
We opened new long positions in the Swiss franc, Australian dollar and Norwegian krone versus the U.S. dollar. These changes increased our overall currency exposure, with a clear bias for a weaker U.S. dollar.
Commodities continued to strengthen in January for the most part. Oil rallied in reaction to political unrest in the Middle East and to supply concerns related to production cuts. Natural gas ended the month higher, with colder temperatures pushing demand higher. Precious metals also rose as gold rallied nearly 3% amid a macro background focused on a weaker U.S. dollar.
We opened new long positions in gold, and closed short positions in platinum and silver during the month. These changes moderately decreased our overall commodity exposure heading into February.